2015 witnessed a boom of incubators in China, especially driven by the government’s appeal for mass innovation and entrepreneurship. It is estimated that the number of Chinese incubators increased by over 4,000 in 2015, the equivalent of the total number of Chinese incubators for the last 26 years. While there are around 10,000 incubators around the world, around half of them are based in China. Now you can tell how hot the Chinese incubator industry is.

However, problems ensue. There are actually lots of bubbles behind the seemingly burgeoning industry. As a matter of fact, some insiders have already voiced their concern. Qiao Huijun, founder of AngelPlus, even predicted that “winter” might befall the Chinese incubator industry in 2016.

Nevertheless, why did the Chinese incubator industry develop so rapidly within less than a year? Will “winter” really befall the industry in 2016? What’s the possible way out?

The past

The term “Incubator”, which originally means the device that can simulates avian incubation by keeping eggs warm and in the correct humidity, and then hatch them, is introduced to the economics and referred to companies that help new and startup companies to develop by providing services such as money, management training and office space, etc. The ultimate goal of incubators is to nurture tech startups or companies, promote cooperation and communication in the startup circle.

The formal concept of business incubation began in the USA in 1959 when Joseph Mancuso separated his 850,000-square-meter warehouse into several units, rent them to different small-sized companies and opened the Batavia Industrial Center in New York. In addition, the center would provide these companies with consulting and even financing services, so that it could better support these companies.

Enlightened by a flock of noisy but vivacious chickens in a chicken-raising company, Joseph Mancuso coined the phrase “business incubator”. While the warehouse, commonly referred to as the Batavia Industrial Center, as the origin of incubator, Joseph Mancuso was named “Father of Business Incubators”.

Later on, incubation expanded in the U.S. in the 1980s and spread to the UK and Europe through various related forms, which made a contribution to the development of various small and mid-sized companies around the world. As of 2006, there were already 1,200 incubators in the US. Wuhan-based Donghu Innovation Incubator, the first business incubator in China, was established in 1987. Since then, incubator has also upgraded from Generation 1.0 to 3.0. In 2015, after Premier Li Keqiang coined the term “mass innovation and entrepreneurship” in the government work report and the Chinese government began to actively support business incubators, the number of incubators surged in China.

The present

“Most Chinese incubators are guided by the government,” Tian Xuan, director of Financial Innovation and Economic Growth Research Center of China Finance Institute, suggested. “Newly-established incubators for tech startups of all levels could receive a government subsidy of as much as 500,000 RMB”, Chu Xiaoming, deputy director of Qingdao National High-Tech Park, said.

Besides subsidy, the Chinese government can also support incubators by providing office space. For example, the local government of Haidian District reduced the coverage of commercial land for 420,000 square meters in order to make room for tech startups in Zhongguancun area.

In addition, the Chinese government showed its support for incubators by upgrading traditional business models, which provides more space for tech startups to play a role. Up till now, over 37 tech service providers, including 36Kr, 3W Coffee, have been included in the government program. Among the 900 incubators, over 700 of them have already received investment. The average investment volume of these incubators is 5 million RMB, and the total volume has already reached 3.02 billion RMB.

As a matter of fact, most incubators in China are partially supported by the government. Of course, potent government support is a good thing for the industry, yet problems might go hand in hand.

The future

The biggest problem of Chinese incubators, however, is that the quality of these incubators vary a great deal. Whether we admit it or not, there are still lots of incubators who couldn’t stand without support support. That’s why there could be bubbles in the industry, and “winter” might befall the burgeoning industry.

Yet, the government is well aware of this fact, and is making its evaluation standards stricter for incubators. “There’s so many newly-established incubators, yet few of them are competent enough. In this case, it’s crucial to tell which ones are really competent”, said Mr. Tian. While competent incubators should receive more government support, keep a steady cash flow and stand firm in the market, incompetent ones should face nothing but bankruptcy.

“Still, the market should have a larger say than the government. In a socialist economy of Chinese characteristics, it’s important that the industry be government by the market rules”, explained Mr. Tian.

Incubators are born first in the US, but “imported” to China. Yet, it seems that we didn’t do a great job to really localize it. To some degree, the Chinese incubator industry is still immature.

On the one hand, most incubators fail to be competent enough. They didn’t promote cooperation and communication at all, and didn’t play much role in nurturing startups.

On the other hand, there are so many “unspoken rules” in the industry. Most incubators are governed by state-owned organizations or schools, so that low risk, balanced interest, duty free are valued more than any other things, which compromised the very role of incubators.

“The government should focus more attention on guiding incubators: nurturing an atmosphere that tolerates failure and encourages innovation,” he advised. Fundamentally, government subsidies aren’t long-lasting, while market rules should play the dominant role.

“A large number of incubators are supported also by real estate giants,” Wang Feiqin, CEO of 3W Space, suggested. What startups really need from incubators are talents and trainings. Only when startups can go through this stage with the help of incubators can a complete ecosystem be established in the industry.

Cui Jingjing, Ph.D at Peking University, joined Chen Yu, a deputy researcher at State Council Development Research Center and issued an article recently, in which they pointed out that the government should focus more attention on regulating incubators instead of lowering taxes for them.

They added that the most important task for the government is to provide legal and policy support for startups, and leave everything else for the market rules to decide.

Although the Chinese incubator industry boomed in recent years, inappropriate development models and too much government support have led to many “over-reliable” incubators who couldn’t survive without the government.

“The support mechanism in the Chinese incubator industry remains to be improved”, Ma Fengling, director of China Tech Company Incubator’s Professional Committee, said.

What’s the way out, then? Chinese incubators should discover more segment markets, and provide more targeted and specialized incubation services. If so, the bubbles in the industry will be rid of, Chinese startups will be able to receive real support from these incubators, and the entire Chinese startup industry will benefit.